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COMPANY ACCOUNTS & AUDITING PRACTICES

DECEMBER 2018 OLD SYLLABUS


SUGGESTED ANSWERS
For Clarifications, Whatsapp 9730768982
Time allowed: 3 hours Maximum marks: 100
Total number of questions: 6 Total number of printed pages: 8

NOTE: 1. Answer ALL Questions.


2. All working notes shall be shown distinctly.

PART – A

1.

(a) What are the conditions to be complied by the company to issue bonus shares? (5 marks)
Section 63 of the Companies Act, 2013 deals with the issue of bonus shares. According to sub-
section (1) of this section, a company may issue fully paid bonus shares to its members, in
any manner whatsoever, out of:
(i) Free Reserves
(ii) Securities Premium Account or
(iii) Capital Redemption Reserve
Provided that no issue of bonus shares shall be made by capitalizing reserves created by
revaluation of assets.

Conditions for Bonus Issue:


(i) It is authorized by its AOA.
(ii) It has, on recommendation of board, has authorized in the general meeting of the company.
(iii) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it;
(iv) it has not defaulted in respect of payment of statutory dues of the employees, such as
contribution to provident fund, gratuity and bonus;
(v) the partly paid up shares, if any outstanding on the date of allotment, are made fully paid
up;
(vi) it shall not be issued in lieu of dividend.

Two Ways to giving Bonus:


(i) Issue of Fully paid bonus shares
(ii) Converting partly paid up shares into fully paid up as bonus

(b) Enumerate the conditions that must be satisfied in order to buy-back of shares according to
section 68(2) of the Companies Act, 2013. (5 marks)

CONDITIONS FOR BUY BACK:


(a) Power in AOA: The buyback shall be authorized by AOA.

(b) Approved: The buyback either approved by BOD or Shareholders.

(c) Debt Equity Ratio: Debt Equity Ratio is not more than twice the capital and its free
reserves after such buy back.
Debt to Capital and Free reserves Ratio shall be 6:1 for Government Companies which carry on Non-Banking
Finance Institutions and Housing Finance Activities.
(d) No Shares or Securities can be bought back unless they are fully paid up.

(e) Explanatory Statement: The Notice of General Meeting shall be annexed with the
Explanatory Statement and shall have the following details:
(i) A full and complete disclosure of all material facts;
(ii) The class of security intended to be purchased under the buy back;
(iii) The necessity of Buy Back
(iv) The amount to be invested under the buy back;
(v) The time limit for completion of buy back;

(f) Completion of Buy Back: The buyback should be completed within 1 year of the date of
passing Board Resolution or Special Resolution as the case may be;

(g) Declaration of Solvency: When a company proposes to buy back its own securities, shall file
with ROC and SEBI (if Listed) a declaration of Solvency signed by at least 2 directors, one of
whom shall be MD, if any, in Form SH 9 before making buy back.

(h) Extinguishment of Securities: After completion of buy back the securities must be
extinguished and physically destroyed within 7 days of the last date of completion of buy back.

(i) No further Issue: After the completion of buy back, the company shall not make a further
issue of shares or other specified securities for a period of 6 months except by way of bonus
shares or in discharge of subsisting obligations such as conversion of options, etc.

(j) Buy Back Return: A company shall file a return of buy back in form SH 15 within 30 days
from the date of completion of buy back. Such form must be signed by two directors, one of
whom shall be MD, if any, certifying that the buyback of securities has been made in
compliance with the provisions of companies act, 2013 and its rules.

(k) Register of Buy Back: The company has to maintain a register of securities so bought, the
consideration paid for the securities bought back, the date of cancellation of securities, the
date of extinguishing and physically destroying of securities and such other particulars as
may be prescribed.

(c) What are the requirements to be complied with by a company to declare dividend out of free
reserves in the event of inadequacy or absence of profit at the end of the year? (5 marks)
In case of inadequacy or absence of profits in any financial year, any company may declare the
dividend out of the previous year’s accumulated profits.

Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014


In the event of inadequacy or absence of profits in any year, a company may declare dividend
out of previous year surplus subject to the fulfillment of the following conditions :

(a) Rate of dividend: The rate of dividend declared shall not exceed the average of the rates at
which dividend was declared by it in the 3 years immediately preceding that year.

Note: This rule shall not apply to a company which has not declared any dividend in
immediately preceding 3 financial years.

(b) Total withdrawal from accumulated profits: The total amount to be drawn from such
accumulated profits shall not exceed 1/10 of the sum of its paid – up share capital and free
reserves as per the latest audited financial statement.
(c) Setting off the losses: The amount so drawn shall first be utilized to set off the losses
incurred in the financial year in which dividend is declared before any dividend in respect of
equity shares is declared.

(d) To maintain reserve : The balance of reserves after withdrawal shall not fall below 15% of
its paid – up share capital as per the latest audited financial statement.

(e) Dividend to be declared only from free reserves: No dividend shall be declared or paid by a
company from its reserves other than free reserves.

(d) On 1st November, 2013 S Ltd. issued 10,000, 8% Debentures of ` 100 each. These debentures
were redeemable at 20% premium on 31st October, 2018 by the way of either converting into
8% Preference Shares of ` 100 each at 30% premium or to be paid in cash. Upto 31st October,
2018 the holders of 7,865 debentures had exercise their option for 8% Preference Shares and
remaining were paid in cash. You are required to:

(i) Find out the nominal value of preference shares issued to debenture-holders.
(ii) Give necessary journal entries. (5 marks)

ANSWER:

(i) Number of Preference Shares to be Issued

= Total Consideration to be paid


Issue Price of Pref Shares

= [(7865*100) + 20%]
(100+30%)

= 9,43,800
130
= 7,260 Preference Shares
Nominal Value of Preference Shares to be issued = 7260*100 = 7,26,000/-

(ii) Journal Entries


Particulars Dr. (`) Cr. (`)
8% Debenture A/c (7865*100) Dr. 7,86,500
Securities Premium A/c (7865*20) Dr. 1,57,300
To 8% Pre. Shares (7260 *100) 7,26,000
To Securities Premium 2,17,800
(Being 7865 debenture holder exercise the option of
conversion)

8% debenture A/c [(10000-7865)*100] Dr. 2,13,500


Securities Premium A/c [(10000-7865)*20] Dr. 42,700
To debenture holder 2,56,200
(Being remaining debenture holder were paid in cash)

Debenture holder Dr. 2,56,200


To Bank 2,56,200
(Being amount paid)
(e) In a liquidation which commenced on 11th November, 2017, certain creditors could not
receive payments out of the realization of assets and out of the contribution from ‘A’ list
contributories.
The following are the details of certain transfer which took place in 2016 and 2017:
Shareholders Number of Shares Date of Transfer Proportionate
Transferred unpaid debts (`)
C 2,500 1st September, 2016 5,000
P 1,500 1st January, 2017 9,000
D 2,000 1st April, 2017 12,000
B 700 1st August, 2017 13,500
S 300 15th September, 2017 14,500

All the shares were ` 10 each, ` 5 paid up.


Ignoring expenses of and remuneration to liquidators, show the amount to be realized
from various persons listed above. (5 marks)

ANSWER:
STATEMENT OF LIABILITY OF B LIST CONTRIBUTORIES
Date Creditors P D B S Amount
outstanding on paid to
date of transfer creditors
1 Jan 2017 9000 3000 4000 1400 600 9000
(15:20:7:3)

1 April 2017 3000 - 2000 700 300 3000


(20:7:3)

1 Aug 2017 1500 - - 1050 450 1500


(7:3)

15 Sept 2017 1000 - - - *150 150


(only S)
3000 6000 3150 1500 13650
*Balance Liability or Amount of Creditor whichever is less
Balance Liability = (300 * 5) – (600 + 300 + 450) = 150
Amount of Creditor = 1000
Whichever is less is 150

Please Note: Mr. C is not a B List Contributory as he already transferred his shares before 1 year
from commencement of winding up.

Attempt all parts of either Q. No. 2 or Q. No. 2A

2.

(a) What corrective action to be taken by the companies to improve Economic Value Added?
(3 marks)
1. First, operating performance with respect to operating profit margins or asset turnover
ratios could be improved to generate more revenue without using more capital.

2. Second, the capital invested in the business might be reduced by selling under-utilized
assets; this strategy will simultaneously improve operating performance through a higher
asset turnover ratio, as well as a reduced capital charge against those earnings because of
a reduced debt or equity capital investment.
3. Third, redeploy the capital invested to projects and activities that have higher operating
performance than the current projects or investments are exhibiting.

4. And fourth, if the business is not highly leveraged, change the capital structure by
substituting lower cost debt for higher cost equity. Although this last strategy will decrease
net income because of the higher interest cost, it will improve the EVA of the business
because the total cost of debt and equity is reduced, and EVA measures the value created
after all costs of capital (debt and equity) have been taken into account.

(b) Mention the costs that are not included in the cost of internally generated intangible
assets. (3 marks)
The following are not components of the cost of an internally generated intangible asset:
(a) selling, administrative and other general overhead expenditure unless this expenditure
can be directly attributed to making the asset ready for use;

(b) clearly identified inefficiencies and initial operating losses incurred before an asset
achieves planned performance; and

(c) expenditure on training the staff to operate the asset.

(c) The following information has been obtained from Guru Ltd. for the year ending 31st
March, 2018:

(1) Authorized, Issued and Subscribed Capital:


200 Lakh Equity Shares of ` 10 each, out of which 100 lakh shares were issued as fully
paid-up, 48 Lakh shares were ` 8 each called-up and paid-up and 1.50 Lakh shares were
` 8 called-up but calls-in-arrear thereon of ` 3 Lakh.

(2) Following are balances of some accounts:


- Capital Reserve ` 150 Lakh
- General Reserve ` 40 Lakh
- Securities Premium ` 130 Lakh
- Statement of Profit and Loss (Dr.) ` 115 Lakh
- Forfeited Shares ` 2 Lakh
You are required to prepare relevant notes to the accounts for the year ended 31st
March, 2018 as per Schedule III of the Companies Act, 2013. (3 marks)

ANS:

NOTES TO ACCOUNT:
1. Share Capital:
ESC
Authorized:
200 lakh equity shares of `10 each 20,00,00,000

Issued & Subscribed & Called up


100 lakh shares full paid up (`10 each) 10,00,00,000

48 lakh shares (`8 Called up & paid up) 3,84,00,000


1.5 lakh shares (`8 Called up) 12,00,000
Call in arrears (3,00,000) 13,93,00,000

Forfeited shares 2,00,000


2. Reserves & Surplus:
Capital Reserve 1,50,00,000
General Reserve 40,00,000
Securities Premium 1,30,00,000
P & L (Dr.) (1,15,00,000) 2,05,00,000

(d) What are the disclosure requirements for each class of asset according to AS-28
(Impairment of Asset). (3 marks)
For each class of assets, the financial statements should disclose the following:
(i) the amount of impairment losses recognised in the statement of profit and loss during
the period and the line item(s) of the statement of profit and loss in which those
impairment losses are included;

(ii) the amount of reversals of impairment losses recognised in the statement of profit and
loss during the period and the line item(s) of the statement of profit and loss in which those
impairment losses are reversed;

(iii) the amount of impairment losses recognised directly against revaluation surplus during
the period; and

(iv) the amount of reversals of impairment losses recognised directly in revaluation surplus
during the period.

(e) The manager of Grapes Ltd. is entitled to a salary of ` 1 (one) Lakh per month and also to a
commission of 2% on profits after taxation and his salary but before charging his
commission on profits. The Statement of Profit and Loss of the company for the year ended
31st March, 2018 was as follows:

Particulars (` in Lakh)
I. Gross Profit 560
II. Expenses
Employees Benefit Expenses 110
Depreciation (including Development Reserve of 15 Lakh) 55
Cost of Finance 22
Other Expenses 60
Total Expenses 247
Profit Before Tax (I-II) 313
Note 1. Employees Benefit Expenses:
(`in Lakh)
Salaries and Wages (excluding Manager’s Salary of ` 12 Lakh) 95
Manager’s Salary paid 12
Directors Fees 3
110

Note 2. Corporate Tax Rate is 30%.


You are required to calculate the total remuneration payable to manager under Section
197 of the Companies Act, 2013. (3 marks)

ANS:
CALCULATION OF MANAGERIAL REMUNERATION (`IN LAKHS)
Particulars ` in Lakhs
Profit before tax 313
(-) Corporate rate tax 30% on 313 (93.9)
Profit after tax 219.1
(+) Development Reserve 15
Profit for calculating MR 234.1

Commission = 2% on 234.1
= 4.682/-

= 4.682 + 12
= 16.682 Lakhs
` Lakhs

OR (Alternate question to Q. No. 2)

2A.

(i) The promoters of Shiva Ltd. took over on behalf of the company, a running business with
effect from 1st April, 2017. The company got incorporated on 1st August, 2017. The annual
accounts were made upto 31st March, 2018, which revealed that the sales for the whole
year totalled ` 2,400 lakhs out of which sales till 31st July, 2017 were for ` 600 lakhs. Gross
Profit ratio was 20%.
The expenses from 1st April, 2017 till 31st March, 2018 were as follows:
Particulars ` in Lakhs
Salaries 75
Rent, Rates and Insurance 30
Sundry office expenses 72
Travellers commission 20
Discount allowed 16
Bad debts 8
Director’s fee 30
Tax audit fee 16
Depreciation on tangible assets 15
Debentures interest 14
Prepare a statement showing the calculation of profits for pre-incorporation and post-
incorporation periods. (5 marks)

ANS:

(1) Time Ratio:


Pre = 1 April 2017 to 1 Aug 2017
= 4 months

Post = 1 Aug 2017 to 31 Mar 2018


= 8 months

4:8
i.e. 1:2

(2) Sales Ratio:


Total Sales = 2400 lakhs
Pre = 1 April 2017 to 31 July 2017 = 600 lakhs
Post = 1 Aug 2017 to 31 Mar 2018
= 2400 – 600
= 1800 lakhs.

600:1800
1:3
Particulars Ratio Amount Pre Post
Gross Profit 1:3 480 120 360
(20%)
(20% 600)
(20% 1800)

Particulars Ratio Amount Pre Post


Salaries 1:2 75 25 50
Rent 1:2 30 10 20
Sundry office exp. 1:2 72 24 48
Traveller commission 1:3 20 5 15
Discount allowed 1:3 16 4 12
Director fee Post 30 - 30
Bad debt 1:3 8 2 6
Tax audit fee 1:2 16 5.33 10.67
(as per ICSI Material,
Time Ratio is taken)
Depreciation 1:2 15 5 10
Debenture Interest Post 14 - 14
Net Profit 184 39.67 144.33

(ii) Udyog Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2018:
Note No. ` in lakh
I. EQUITY & LIABILITIES
(1) Shareholders’ Funds:
(a) Share Capital 1 2,400
(b) Reserves & Surplus 2 1,620
(2) Non-Current Liabilities:
12% Debentures 1,500
(3) Current Liabilities 3 1,880
Total 7,400
II. ASSETS
(1) Non-Current Assets:
Fixed Assets 4,052
(2) Current Assets 4 3,348
Total 7,400
Note 1: Share Capital:
240 Lakh fully paid Equity Shares ` 10 each 2,400
Note 2: Reserve & Surplus:
Security Premium 350
General Reserve 530
Capital Redemption Reserve 400
Profit and Loss Account 340
1,620
Note 3: Current Liabilities:
Trade Payables 1,490
Other Current Liabilities 390
1,880
Note 4: Current Assets:
Current Investments 148
Inventories 1,200
Trade Receivables 520
Cash and Bank 1,480
3,348
Additional Information:
(i) On 1st April, 2018, the company announced buy-back of 25% of its equity shares @ ` 15
per share. For this purpose it sold all its current investments for ` 150 lakh.
(ii) On 10th April, 2018, the company achieved the target of buy-back.
(iii) On 30th April, 2018, the company issued one fully paid up equity shares of ` 10 each by
way of bonus for every four equity shares held by capitalization of reserves.
You are required to prepare Balance Sheet after bonus issue as per Schedule III of
Companies Act, 2013. (5 marks)
I. Equity & Liabilities:
(1) Shareholders Fund
(a) Share Capital (2400 – 600 + 450) 2250

(b) Reserve & Surplus 872

(2) Non-Current Liability


12% debenture 1500

(3) Current Liability 1880


Total 6502
II. Assets:
1. Non Current Assets
Property Plant & Equipment 4052

2. Current Assets 2450


6502
Note 1. Share Capital
225 lakh fully paid ES of 10 each.(240 – 60 + 45) 2250
2250
Note 2. Reserve & Surplus
Securities Premium (350 – 300) 50
CRR (400+600-450) 550
P & L (340 – 70 + 2) 272
General Reserve (530-530) 0
872
Note 3. Current Liability
Trade Payables 1490
Other Current Liability 390
1880
Note 4. Current Assets
Inventories 1200
Trade Receivables 520
Cash at Bank (1480 + 150 – 900) 730
2450
Profit on sale of investments = 150 – 148 = 2
Transfer to CRR: 530 from GR & 70 from P & L.
Bonus issue out of CRR (2400-600) *1/4 = 450

(iii) Pina Ltd. issued to public 2,00,00,000 equity shares of ` 10 each at 25% premium which
was payable ` 6 per share on application and the balance on allotment. The issue was
underwritten by Poova Underwriters Ltd. for a maximum commission as per section 40(6)
read with rule 13 of the Companies Act, 2013. The public subscribed for 1,45,00,000 equity
shares and the rest had to be taken up by the Poova Underwriters Ltd. At the end of the
year these shares were quoted in the share market at ` 10.15 per share.
You are required to prepare the necessary ledger accounts in the books of underwriter. (5
marks)
Ledger A/c
In the books of Poova Underwriters

Pina Ltd.
Dr. Cr.
Date Particulars Amount Date Particulars Amount
To Underwriting 1,25,00,000 By ESC 6,87,50,000
Commission
To Bank 5,62,50,000
6,87,50,000 6,87,50,000

Underwriting Commission A/c


Date Particulars Amount Date Particulars Amount
To P & L 1,25,00,000 By Pine Ltd. 1,25,00,000
1,25,00,000 1,25,00,000

Underwritting Commission = (2,00,00,000 * 12.5) * 5% = 1,25,00,000/-


Amount due on Allotment = (2,00,00,000- 1,45,00,000) * 12.5 = 6,87,50,000/-

3.

(a) Toly Ltd. proposed to purchase the business carried on by Sonu on 31st March, 2018. For
the purpose of valuation of goodwill the weights to be used and book profits for past four
years were as follows:
Year Weight Profit (`)
2014-15 1 70,40,000
2015-16 2 95,50,000
2016-17 3 68,30,000
2017-18 4 1,04,20,000

On the scrutiny of the accounts the following matters were revealed:


(1) On 1st December, 2016 a major repair was made in respect of plant incurring `
25,20,000 and was charged to Profit and Loss Account. The said sum is agreed to be
capitalized for the purpose of calculation of goodwill subject to adjustment of yearly
depreciation @ 10% per annum on reducing balance method.
(2) The closing stock for the year 2015-16 was overvalued by ` 8,60,000.
(3) To cover management cost an annual charge of ` 17,50,000 was not made.
(4) Average capital employed in the Sonu’s business was ` 4,50,00,000 and normal rate of
returns on similar business is 12%.
You are required to calculate the value of the goodwill of Sonu’s business on the basis of 5
years purchase of superprofit. (5 marks)

ANS:
Computation of FMV
2014-15 2015-16 2016-17 2017-18
Profit before adjustment 70,04,000 95,50,000 68,30,000 1,04,20,000
(+) Part of machinery
charge to revenue 25,20,000
(-) Depn on part capitalize *(84,000) **(2,43,600)
(+/_) Adjustment in
closing stock (8,60,000) 8,60,000
Adjusted Profits 70,04,000 86,90,000 1,01,26,000 10,17,6,400
Weights 1 2 3 4
70,04,000 1,73,80,000 3,03.78,000 4,07,05,600
*(25,20,000 * 10% * 4/12 = 84,000)
**(25,20,000 – 84,000) * 10% = 2,43,600

(b) Mudgal Ltd. offered 400 Lakh equity shares of ` 10 each to the public. The amount was
payable as to ` 4 on application. ` 5 (including premium) on allotment and ` 3 on call. The
issue was subscribed to the extent of (two and one-fourth) times. Applications for below
100 shares (for 200 Lakh shares in total) were rejected. An applicant for 200 Lakh shares
was allotted 80 Lakh shares. The remaining shares were allotted on pro-rata basis to other
applicants. The excess amount received on applications to the extent of allotment dues was
retained. Shareholders holding 16 Lakh shares out of pro-rata issue failed to pay the
allotment money and call money. Their shares were forfeited. 10 Lakh equity shares were
re-issued at ` 9 per share fully paid.
Show the journal entries including cash transactions. (5 marks)

ANS:
Particulars Dr (`) Cr (`)
(in Lakhs) (In Lakhs)
(1) Bank A/c (900 * 4) Dr. 3600
To Application Money 3600
(Being application money received on 900 lakh
shares)

(2) Share application Dr. 3600


To Bank (200 * 4) 800
To Call in advance (WN 1) 1200
To ESC (400 * 4) 1600
(Being shares allotted and surplus transfer to call in
advance A/c)

(3) Share allotment (400 * 5) Dr. 2000


To Share capital (400 * 3) 1200
To Securities Premium (400*2) 800
(Being share allotment money due on 400 shares @ 5
(including premium `2 per shares)

(4) Bank A/c Dr. 836


Call in advance (WN 2) Dr. 1120
Call in arrear (WN 3) Dr. 44
To Share allotment 2000
(Being call in advance money adjusted towards
allotment)
(5) Share 1st Call (400*3) Dr. 1200
To Share Capital 1200
(Being call due on 400 lakh equity share `3 per share)

(6) Bank Dr. 1072


Call in advance (WN 4) Dr. 80
Call in arrear (16*3) Dr. 48
To Share Call 1200
(Being call money received on shares except 16 lakh
shares)
(7) Share capital (16*10) Dr. 160
Securities premium (16*2) Dr. 32
To Call in Arrears 92
To Share Forfeiture (25*4) 100
(Being forfeiture of 16 lakh shares including SP)

(8) Bank (10*9) Dr. 90


Share Forfeiture (Loss) Dr. 10
To ESC 100
(Being ESC reissued at `9)

(9) S.F. (WN 5) Dr. 52.5


To C/R 52.5
(Being unsecured balance of share forfeiture account
in respect of 16 lakh shares transferred to capital
reserve account)

Working Note:
1) (200 – 80) *4 = 480
[(900applied – 200rejected – 200alloted) – (400total issue – 80alloted)] * 4 = (500 – 320) *
4 = 720
Total = 480+720 = 1200

2) Call in Advance to be adjusted against allotment money


(80 * 5) + [(500-320) *4 ] = 1120

3) Call in Arrears =
Shares applied for by holder of 16 lakhs shares = 16/320 * 500 = 25 lakhs
Amount received on application = 25 * 4= 100 lakhs
Amount adjustment on application = 16*4 = 64 lakhs
Excess amount towards allotment = 100-64=36 Lakhs
Amount not received on allotment = (16 * 5) – 36 = 44 Lakhs

4) Call in advance to adjusted against call money


Amount received on 200 lakhs shares = 200 * 4 = 800
Amount adjusted on application (80 alloted) = 80 * 4 = 320
Excess = 800 -320 = 480
Adjusted against allotment money = (80 * 5 = 400
Excess towards call money = 480 – 400 = 80

5) Amount transferred from Share Forfeiture to Capital Reserve related to 10 Lakh


shares:
Shares applied for by holder of 10 lakhs shares = 10/320 * 500 = 15.625 Lakhs
Amount received on application = 15.625 * 4 = 62.5 Lakhs
Amount transferred = amount received – loss adjusted on reissue
= 62.5 – 10
= 52.5 Lakhs

(c) A liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the


amount distributed to preferential creditors and 3% on the payment made to unsecured
creditors.
The assets were realized for ` 50,00,000 against which payment was made as follows:
Particulars (`)
Liquidation Expenses 50,000
Secured Creditors 20,00,000
Preferential Creditors 1,50,000
Amount due to Unsecured Creditors 30,00,000

You are required to calculate the total remuneration payable to liquidator. (5 marks)

ANS:
Liquidation Remuneration
2% on 50,00,000 = 1,00,000
(+) 3% on 1,50,000 = 4,500

Asset realized 50,00,000


(-) Remuneration on asset realize & preferential creditor 1,04,500
(-) Liquidation exp. 50,000
(-) Secured creditor 20,00,000
(-) Preferential creditor 1,50,000
Amount payable to unsecured creditor & 3% Remuneration 26,95,500
to Liquidator thereon

4.

(a) Pine International Ltd. was wound up on 31-3-18 and its summarized Balance Sheet as on
that date was as follows:
Note No. `
I. EQUITY & LIABILITIES
(1) Shareholders’ Funds:
(a) Share Capital 1 12,00,000
(b) Reserves & Surplus 2 5,64,000
(2) Current Liabilities 3 4,86,000
Total 22,50,000
II. ASSETS
(1) Non-Current Assets: Fixed Assets 9,64,000
(2) Current Assets 4 12,86,000
Total 22,50,000
Note 1: Share Capital:
1,20,000 Equity Shares ` 10 each fully paid up 12,00,000
12,00,000
Note 2: Reserve and Surplus:
Profit prior to incorporation 42,000
Contingency Reserve 2,70,000
Profit and Loss Account 2,52,000
5,64,000
Note 3: Current Liabilities:
Sundry Creditors 2,26,000
Bills Payable 40,000
Provision for Income Tax 2,20,000
4,86,000
Note 4: Current Assets:
Inventories 7,75,000
Cash at Bank 3,29,000
Sundry Debtors 1,60,000
Less: Provisions for Bad & Doubtful debt 8,000 1,52,000
Bills Receivable 30,000
12,86,000

Apple Ltd. took over the following assets at the value shown below:
Fixed Assets ` 12,80,000
Inventories ` 7,70,000
Bills Receivables ` 30,000

Purchase consideration was settled by Apple Ltd. as under:


(i) ` 5,10,000 of the consideration was satisfied by the allotment of fully paid 10%
preference shares of ` 100 each.
(ii) The balance was settled by issuing equity shares of ` 10 each, ` 8 per share paid up.
Sundry Debtors realized ` 1,50,000. Bills payable was settled for
` 38,000. Income-tax authorities fixed the taxation liability at ` 2,22,000. Sundry creditors
were finally settled with cash remaining after paying liquidation expenses of ` 8,000.
You are required to:
(i) Calculate the number of equity shares and preference shares to be allotted by Apple Ltd.
in discharge of purchase consideration.
(ii) Prepare the realization account, cash at bank account, Equity Shareholder’s account and
Apple Ltd. account in the books of Pine International Ltd. (8 marks)

Ans:
(1)
Computation of PC
F. A. 12,80,000
Inv. 7,70,000
B/R 30,000
20,80,000

Discharged of PC
PSC 5,10,000
ESC. 15,70,000

20,80,000

1,96,250 Shares of 10 each; `8 paid up are to be issued for Discharge of PC.

(2)
REALISATION
Particulars ` Particulars `
To F.A. 9,64,000 By R.D.D. 8,000
To Inv. 7,75,000 By S/C 2,26,000
To Sundry Debtor 1,60,000 By B/P 40,000
To B/R 30,000 By Pr. For Tax 2,20,000
To Cash By Cash
B/P 38,000 S/D 1,50,000
Tax 2,22,000 By Apple Ltd 20,80,000
Liq. Exp. 8,000
Creditor 2,11,000
To Profit 3,16,000
27,24,000 27,24,000

CASH OF BANK
Particulars ` Particulars `
To of 3,29,000 By Realisation 38,000
To Realisation 1,50,000 By Realisation 2,22,000
By Realisation 8,000
By Realisation (Balance) 2,11,000
4,79,000 4,79,000

EQUITY SHAREHOLDERS
Particulars ` Particulars `
To PS of Apple 5,10,000 By SC 12,00,000
To ES of Apple 15,70,000 By R & S 5,64,000
By Realisation 3,16,000
20,80,000 20,80,000

APPLE LTD.
Particulars ` Particulars `
To Realisation 20,80,000 By PS of Apple 5,10,000
By ES of Apple 15,70,000
20,80,000 20,80,000

(b) The Balance Sheets of H Ltd. and S Ltd. as on 31st March, 2018 are given below:
(` in Lakh)
H Ltd. (`) S Ltd. (`)
I. EQUITY AND LIABILIITES
(1) Shareholders’ Funds:
(a) Share Capital:
Equity Shares of ` 100 each fully paid 2,500 800
(b) Reserves and Surplus:
General Reserve 600 250
Profits 300 200
(2) Current Liabilities:
Trade Payables 450 330
Total 3,850 1,580
II. ASSETS
(1) Non-Current Assets:
(a) Tangible Assets:
Land and Building 1,670 720
Plant and Machinery 440 289
(b) Long-term Investment (6,00,000 Shares in S Ltd.) 980 -
(2) Current Assets 760 571
Total 3,850 1,580
H Ltd. acquired the shares in S Ltd. on 31st March, 2017. On that date General Reserve and Profits
of S Ltd. stood at ` 150 Lakh and ` 120 Lakh respectively. Land and Building (Book Value ` 800
Lakh) and Plant and Machinery (Book Value ` 340 Lakh) of S Ltd. were revealed at ` 980 Lakh and
` 310 Lakh respectively, book value of remaining assets were unchanged.
You are required to prepare Consolidated Balance Sheet by ignoring Note to Accounts. (7 marks)

Ans:
SHAREHOLDING PATTERN OF S LTD.
H Ltd. 6,00,000 Shares 75%
MI 2,00,000 Shares 25%
8,00,000 Shares

ANALYSIS OF PROFITS OF SUBSIDIARY (`in lakhs)


Pre. Post
G/R P&L G/R P&L
Op. 150 120 100 80
(+) Revaluation Reserve - - -
L&B 180
P&M (30) - - -
(-) Depreciation due to - - -
Revaluation
L&B (18)
P&M - - - 4.5
Balance 150 270 100 66.5
FI (75%) 112.5 202.5 75 49.875
MI (25%) 37.5 67.5 25 16.625

COST OF CONTROL
Particulars (`in lakhs)
Cost of Inv. 980
(-) SC (600)
(-) Pre. G/R (112.5)
(-) Pre P & L (202.5)
Goodwill 65

MINORITY INTEREST
SC 200
Pre. G/R 37.5
Pre. P & L 67.5
Post G/R 25
P&L 16.625
346.625

R & S IN CONSOLIDATED BALANCE SHEET


G/R (600+75) 675
Profits (300+49.875) 349.875
1024.875

CONSOLIDATED BALANCE SHEET


As on 31.03.2018
EQUITIES & LIABILITIES ` in Lakhs
Share Capital 2500
Minority Interest 346.625
Reserves & Surplus 1024.875
Current Liabilities 780
Total 4651.5

ASSETS
PROPERTY PLANT & EQUIPMENT
L & B (1670+980-98) 2552
R & M (440+310-46.5) 703.5

INTANGIBLE FIXED ASSETS


Goodwill 65

CURRENT ASSETS (760+571) 1331


4651.5

PART – B

5.

(a) What are the objectives of Management Information system review?


Management Information Systems Review Objectives
1. To determine whether review procedures are necessary to achieve stated objectives.

2. To determine whether MIS policies or practices, processes, objectives, and internal controls
are adequate.

3. To evaluate whether MIS applications provide users with timely, accurate, consistent,
complete, and relevant information.

4. To assess the types and level of risk associated with MIS and the quality of controls over
those risks.

5. To determine whether MIS applications and enhancements to existing systems adequately


support corporate goals.

6. To determine whether MIS is being developed in compliance with an approved corporate


MIS policy or practice statement.

7. To determine whether management is committed to providing the resources needed to


develop the required MIS.

8. To determine if officers are operating according to established guidelines.

9. To evaluate the scope and adequacy of audit activities.

10. To initiate corrective action when policies or practices, processes, objectives, or internal
controls are deficient.

11. To determine if any additional work is needed to fulfill the examination strategy of the
institution.

(b) Which companies are excluded from CARO 2015?


It shall apply to every company including a foreign company as defined in clause (42) of
section 2 of the Companies Act, 2013 (18 of 2013) [hereinafter referred to as the Companies
Act], except–
(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act,
1949;

(ii) an insurance company as defined under the Insurance Act,1938;

(iii) a company licensed to operate under section 8 of the Companies Act;

(iv) a One Person Company as defined under clause (62) of section 2 of the Companies Act and
a small company as defined under clause (85) of section 2 of the Companies Act; and

(v) a private limited company, not being a subsidiary or holding company of a public company,
having a paid up capital and reserves and surplus not more than rupees one crore as on the
balance sheet date and which does not have total borrowings exceeding rupees one crore from
any bank or financial institution at any point of time during the financial year and which does
not have a total revenue as disclosed in Scheduled III to the Companies Act, 2013 (including
revenue from discontinuing operations) exceeding rupees ten crore during the financial year as
per the financial statements.

(c) Explain the main points that should be considered by auditor in verification of Assets and
Liabilities. (5 marks each)
While conducting verification following points should be considered by the auditor:-
1. Existence: The auditor should confirm that all the assets of the company physically exist on
the date of balance sheet.

2. Possession: The auditor has to verify that the assets are in the possession of the company
on the date of balance sheet.

3. Ownership: The auditor should confirm that the asset is legally owned by the company.

4. Charge or lien: The auditor has to verify whether the asset is subject to any charge or lien.

5. Record: The auditor should confirm that all the assets and liabilities are recorded in the
books of account and there is no omission of asset or liability.

6. Audit report: Under CARO the auditor has to report whether the management has
conducted physical verification of fixed assets and stock and the difference, if any, between the
physical inventory and the
inventory as per the book.

7. Event after balance sheet date: The auditor should find out whether any event after the date
of balance sheet has affected any items of assets and liabilities.

Attempt all parts of either Q. No. 6 or Q. No. 6A

6.

(a) What is the procedure of issuing auditing standards?


1. The Auditing and Assurance Standards Board identifies the areas where auditing standards
need to be formulated and the priority in regard to their selection.

2. In the preparation of the auditing standards, the Board is normally, assisted by study
groups comprising of a cross section of members of the Institute.
3. On the basis of the work of the study groups, an Exposure Draft of the proposed auditing
standard is prepared by the Board and issued for comments of the members.

4. After taking into the comments received, the draft of the proposed auditing standard is
finalized by the Board and submitted to the Council of the Institute.

5. The Council considers the final draft of the proposed auditing standard and, if necessary,
modifies the same in consultation with the Board. The auditing standard is then issued under
the authority of the Council.

While formulating the auditing standards, the Board also takes into consideration the
applicable laws, customs, usages and business environment in the country.

(b) What do you mean by propriety audit? What main aspects to be verified by auditor under this
audit?
1. Kohler has defined propriety as that which meets the test of public interest, commonly
accepted customs and standard of conduct and particularly as applied to professional
performance, requirements of Government regulations and professional codes.

2. Propriety Audit carry out to check, mean whether the transactions have been done in
conformity with established rules, principles and established standard.

3. The Propriety Audit means the verification of following main aspects to find out whether:
(i) Proper recording has been done in appropriate books of accounts.
(ii) The assets have not been misused and have been properly safeguarded.
(iii) The business funds have been utilized properly.
(iv) The concern is yielding the expected results.

4. The system of Propriety Audit is applied in respect to Government companies, Government


Department because public money and public interest are involved therein.

5. It is an essential function of audit to bring to light not only cases of clear irregularity but
also every matter which in its judgement appears to involve improper expenditure or waste of
public money or stores, even though the accounts themselves may be insufficient to see that
sundry rules or orders of competent authority have been observed.

6. It is of equal importance to ensure that the broad principles of orthodox finance are borne
in mind not only by disbursing officers but also by sanctioning authorities.

(c) Though internal controls may be well designed, yet certain limitations are inherent in all
internal control system. What are included in these limitations? (5 marks each)
1. Cost effectiveness  Cost of implementation of control may be more than its
benefits.
 Thus, management usually doesn’t implement best controls.

2. Human error  Human Error, which may occur while carrying out I.C.
system.
 Itmay be due to misunderstanding on part of personnel.

3. Collusion among The possibility of circumvention of controls through collusion


employees with parties outside the entity or with employees of entity; For
example, management may enter into side agreements with
customers that alter the terms and conditions of the entity’s
standard sales contracts, which may result in improper revenue
recognition.
4. Abuse of authority The possibility that a person responsible for exercising control
could abuse that authority,
For example, person responsible for issuance of stationery to
various departments only for authorized use, can himself
misappropriate stationery for personal use.
5. Manipulations by  Manipulation by high level management may not be detected
management by control system.
 For example manipulation in estimates appearing in
financial statements.

6. No control for The fact that most controls do not tend to be directed at
unusual transaction transactions of unusual nature.
7. Inadequate The possibility that procedures may become inadequate due to
procedure changes in conditions and compliance with procedures may
deteriorate.

OR (Alternate question to Q. No. 6)

6A.

(i) What are the duties of auditor if he notices fraud during the course of audit?
If an auditor of a company, in the course of the performance of his duties as auditor, has
reason to believe that an offence involving fraud is being or has been committed against the
company by officers or employees of the company, which involves or is expected to involve
individually an amount of Rs. 1 Crore or above, he shall immediately report the matter to the
Central Government within such time and in such manner prescribed in Rule 13.

Auditor shall forward his report to the Board or the Audit Committee, as the case may be,
immediately after he comes to knowledge of the fraud but not later than 2 days, seeking their
reply or observations within forty-five days;

On receipt of such reply or observations the auditor shall forward his report and the reply or
observations of the Board or the Audit Committee along with his comments (on such reply or
observations of the Board or the Audit Committee) to the Central Government within 15 days
of receipt of such reply or observations;

In case the auditor fails to get any reply or observations from the Board or the Audit
Committee within the stipulated period of forty-five days, he shall forward his report to the
Central Government alongwith a note containing the details of his report that was earlier
forwarded to the Board or the Audit Committee for which he failed to receive any reply or
observations within the stipulated time.

Further, the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed
cover by Registered Post with Acknowledgement Due or by Speed post followed by an e-mail in
confirmation of the same. This report shall be on the letter-head of the auditor containing
postal address, e-mail address and contact number and be signed by the auditor with his seal
and shall indicate his Membership Number. The report shall be in the form of a statement as
specified in Form ADT-4.

No duty to which an auditor of a company may be subject to shall be regarded as having been
contravened by reason of his reporting the matter above if it is done in good faith. It is very
important to note that the provision of this rule shall also apply, mutatis mutandis, to a cost
auditor and a secretarial auditor during the performance of his duties under section 148 and
section 204 respectively. If any auditor, cost accountant or company secretary in practice do
not comply with the provisions of sub-section (12) of section 143, he shall be punishable with
fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh
rupees)

In case of a fraud involving lesser than the amount of Rs. 1 Crore, the auditor shall report the
matter to Audit Committee constituted under Section 177 or to the Board immediately but not
later than 2 days of his knowledge of the fraud and he shall report the matter specifying the
following:
o Nature of Fraud with description]
o Approximate Amount involved
o Parties involved

The following details of each of the fraud reporting to the Audit Committee or the Board shall
be disclosed in the Board’s Report:
o Nature of Fraud with description
o Approximate Amount involved
o Parties involved, remedial action not taken
o Remedial actions taken

(ii) Explain commonly used methods to be used by auditor in selection of audit sample.
The auditor should select sample items in such a way that the sample can be expected to be
representative of the population. This requires that all items in the population have an
opportunity of being selected.

While there are a number of selection methods, three methods commonly used are:
Random selection, which ensures that all items in the population have an equal chance of
selection, for example, by use of random number tables.

Systematic selection, which involves selecting items using a constant interval between
selections, the first interval having a random start. The interval might be based on a certain
number of items (for example, every 20th voucher number) or on monetary totals (for example,
every ` 1,000 increase in the cumulative value of the population). When using systematic
selection, the auditor would need to determine that the population is not structured in such a
manner that the sampling interval corresponds with a particular pattern in the population.

For example, if in a population of branch sales, a particular branch’s sales occur only as every
100th item and the sampling interval selected is 50, the result would be that the auditor
would have selected all, or none, of the sales of that particular branch.

Haphazard selection, which may be an acceptable alternative to random selection, provided


the auditor attempts to draw a representative sample from the entire population with no
intention to either include or exclude specific units. When the auditor uses this method, care
needs to be taken to guard against making a selection that is biased, for example, towards
items which are easily located, as they may not be representative.

(iii) What are the objectives of review of Manufacturing operations? (5 marks each)
In general parlance, Manufacturing means converting an input (Raw material) into output
(finished product) with the use of man, machines, material, power etc. Such finished goods
may be used for manufacturing other, more complex products, such as aircraft, household
appliances or automobiles, or sold to wholesalers, who in turn sell them to retailers, who then
sell them to end users – the “consumers”. Manufacturing operations is a prime source of
money outflow i.e. a large amount of money is spent on manufacturing process e.g. in buying
machinery, raw material, consumables, paying salary to workers etc. It is very important to
review the manufacturing operations in timely manner so that the identified in-efficiency may
be eliminated controlled on immediate basis.

Objectives of Review of Manufacturing Operations


1. Whether the organization have any manufacturing process management system.

2. Whether the policies and procedures for production planning well defined & well
documented.

3. Whether the organisation have a quality management system in place. If so, whether the
organisation have a written quality policy and whether it is adhered or not.

4. Whether the organization is following six sigma. Whether the organisation have a written
maintenance policy.

5. Whether the organization have a written scrap policy.

6. Whether security policies are documented or not.


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